Middle Class Retirees Must Modify Living Standards

Almost three out of five new middle-class retirees will outlive their financial assets if they attempt to maintain their pre-retirement standard of living, according to the study by Ernst & Young LLP, on behalf of Americans for Secure Retirement.

In a telephone press conference, primary study author Tom Neubig, national director of quantitative economics and statistics, Ernst & Young, said the study finds that middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24% to minimize the likelihood of outliving their financial assets. Those who are seven years out from retirement will have to reduce their standard of living by an average of 37%.

Joe Reali, Chairman of Americans for Secure Retirement, clarified that while experts say retirees can maintain the same standard of living with income equal to 59% to 71% of their pre-retirement wages, the study findings mean current retirees can only consume an annual income 24% lower than these levels to make their retirement savings last.

Neubig also noted that the study found a guaranteed source of retirement income beyond Social Security, such as an annuity or defined benefit plan, better prepared retirees to have a financially secure retirement. As an example, he said married couples who have a guaranteed source of retirement other than Social Security income making $75,000 at retirement have a 31% chance of outliving their financial assets if they retain their pre-retirement standard of living, compared with a 90% chance for those with Social Security as their only guaranteed income.

Stated Differences

The study found that married couples are more likely to outlive their financial assets, due to their longer joint life spans, than single households.

Citizens of Montana, Wyoming, and South Dakota have the highest likelihood of outliving retirement savings. Citizens of Washington, D.C., Rhode Island, Utah, and New York have the least likelihood of outliving retirement savings.
Neubig pointed out that many D.C. residents are more financially prepared for retirement because they participate in the federal defined benefit plan.

The Ernst & Young study evaluates retirement vulnerability for 36 different types of typical middle-class households, defined by three income levels ($50,000, $75,000 and $100,000 of pre-retirement income); for married couples, single males and single females; by employer-provided defined benefit pension coverage status; and by age (near-retiree new retiree). The near-retiree is age 58, and planning to retire at age 65. The recent retiree is age 65.